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SME Credit Availability
Around the World:
Evidence from the World Bank’s Enterprise Survey
2012 Southern Finance Association Annual Meeting
Nov. 15, 2012
Rebel A. Cole, Driehaus College of Business at DePaul University
Andreas Dietrich, Lucerne University of Applied Sciences and Arts
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Eastern Finance Association Annual Meeting 2009
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Agenda
1
Introduction
2
Literature Overview
3
Model, Methodology and Data
4
Findings and Conclusions
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Background and Motivation
- Lack of access to finance is a growth constraint
for small and medium-sized firms; and has a
negative impact on a country‘s economy
- Research has shown that SMEs are very
important for any economy, esp. for
employment and GDP.
- In the U.S., for example, small firms account
for about half of GDP growth and 2/3rd of new
jobs.
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Background and Motivation
- The answers to the questions “who needs
credit,” “who applies for credit,” and “who gets
credit” are of great importance not only to the
firms themselves, but also to prospective
lenders to these firms and to policymakers
interested in the financial health of these firms
- In this paper, we analyze data from a series of
World Bank sponsored surveys of 80 countries
to provide new evidence on how to answer
these three questions.
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Research Question
What determines the
credit need, credit
application and credit
availability?
– Firm characteristics?
– Market characteristics?
– Environmental
characteristics?

Owner
characteristics
Firm
characteristics
Environmental
characteristics
Credit need/
Credit application/
Credit availability
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Methodology – Our Approach
Non-Borrower
No
(1)
Need Credit?
Discouraged
Borrower
Yes
No
Unsuccessful
Borrower
(2)
Apply for Credit?
Yes
No
(3)
Get Credit?
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Andreas Dietrich
Eastern Finance Association Annual Meeting 2009
Yes
Successful
Borrower
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Why is this study important?
- Almost no study analyzes the “No-Need” firms
- Many existing studies ignore “discouraged” firms
that need credit but don’t apply
- “Discouraged” firms are numerous
- To improve availability of credit, it is critically
important to better understand these firms
- Many studies pool “discouraged” firms with
“denied” firms to analyze credit allocation
- This can lead to faulty conclusions if the two
groups differ systematically
- We provide new evidence, analyzing data from
2006-2011, including 80 countries
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Agenda
1
Introduction
2
Literature Overview
3
Model, Methodology and Data
4
Findings and Conclusions
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Existing Literature
- The availability of credit is one of the most
fundamental issues facing a small business and
has received a lot of attention in the academic
literature (e.g., Petersen/Rajan, 1994;
Berger/Udell, 1995; Cole, 1998)
- Cole (2009) first proposed this taxonomy of
firms. Who needs credit, who gets credit.
- Some studies are using the World Bank’s SME
Surveys
- Beck et al. (2008; 48 countries, 3,000 firms)
find that, in countries with poor institutions,
firms (and especially small firms) use less
finance.
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Existing Literature
- Chakravarty and Xiang (2009; 10 countries,
8,000 firms) find that discouraged firms differ
across developed and developing countries;
and that larger firms, more transparent firms,
and firms with stronger banking relationships
are less likely to be discouraged
- Brown et al. (2011; data from 2004/5; 2008)
look at 20 countries in Eastern and Western
Europe prior to the financial crisis and find that
small and financially opaque firms are less
likely to apply for credit. Most interestingly,
they also find that firms applying for credit
rarely are denied credit.
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Andreas Dietrich
Eastern Finance Association Annual Meeting 2009
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Agenda
1
Introduction
2
Literature Overview
3
Model, Methodology and Data
4
Findings and Conclusions
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Eastern Finance Association Annual Meeting 2009
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Methodology:
Univariate and Multivariate Test
- Once we have classified each firm, we calculate
univariate statistics for each group and test for
significant differences in means across groups
- We then run a sequence of three logistic regression
models to explain each step of the credit approval
process:
- 1. Need credit? (Yes or No?)
- 2. Apply for credit? (Yes or No?)
- 3. Get credit? (Approved or Denied?)
- We further analyze whether the results differ
between developing and developed countries
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Sample Data – Our Determinants
Owner Characteristics
 Experience Management
 Domestic vs. Foreign owned
 Gender
Firm Characteristics
 Age
 Size
 Growth
 Legal form
 Industry
 External auditor
Credit
need and
credit
availability
Environmental Characteristics
 City Size (rural vs. City)
 GDP growth
 GDP per capita
 Inflation
 Year Dummies (2006-2011)
Market maturity
 Developed vs.
Developing
countries
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Data
- Our data are taken from the World Bank’s
Enterprise Surveys.
- WB conducted these surveys in 99 countries
between 2006 and 2011.
- Since 2006: A “Global Methodology” makes the
surveys comparable across countries and years)
- Our final sample includes 43,418 firm-year
observations from 80 countries over the 2006 –
2011 period.
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Data
- Limitation of the WBES:
- Some data gathered are based on subjective
perceptions of the owners and managers of the
firms
- Some key information about firms that typically
are required by banks when a company applies
for a loan (performance indicators, capital
structure, margins, etc.) are not included in the
survey data.
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Desc & Univariate Stats
32%
39%
50%
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It seems that older firms need less credit, are less discouraged and are more likely
to be granted a loan
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Agenda
1
Introduction
2
Literature Overview
3
Model, Methodology and Data
4
Findings and Conclusions
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Regression Results I – Firm Characteristics
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Regression Results II – Market Characteristics
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Regression Results III – Owner Characteristics
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Results/Conclusions
- As compared with results for the U.S. (see Cole,
2009), we find that firms around the world are:
- much more likely to be discouraged from applying
for credit (40% vs. 30%; developed: 33%;
developing: 44%),
- are much more likely to be denied credit (50% vs.
20%) when they need and apply for credit
Credit is much less “available” around the world
than in the U.S., so that policies to improve the
availability of credit are even more important
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Results/Conclusions
- Credit constraints might limit product development
and innovation by some firms, possibly harming
long-term economic growth
- Policy to increase information sharing and
transparency (for example by external auditors)
seem to be an effective way to improve credit
availability
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Limitations
- The reason why a firm is discouraged from applying for a
loan is not fully clear, e.g. discouraged borrowers due to
high interest rates/ large collateral:
- Non economic reasons (such as discrimination) and thus true
impediments of promising firms/projects?
- Or financial difficulties of the firm?
- Not clear whether the large fraction of discouraged and
denied borrowers is reflecting missed growth opportunities
or whether it is the result of a useful screening of weak
applicants
- Interesting data, such as profitability, capital structure, etc.
are not available from the surveys.
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Thank you!
Questions / Comments?
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